Insight
BEPS - it only affects the multinationals, right?
March 2016
Many of these issues will be addressed in future articles. More immediately, there are certain steps that multinational companies - and, more directly, their local offices - need to be putting in place now.
The tax-planning strategies of Amazon, Google, Starbucks and others have been met with outrage from the press and general public, and also from SMEs finding themselves with a higher effective (and, in some instances, net) tax burden than the multinationals. The OECD's Base Erosion and Profit Shifting (BEPS) Action Plan, launched in July 2013, is a direct response to this, intended to stop multinationals exploiting differential tax regimes by 'shifting' profits to lower-tax jurisdictions regardless of where their operations are genuinely based.
The OECD's final BEPS proposals were published at the G20 meeting of finance ministers in October 2015. The various BEPS initiatives must be adopted by individual nation states, and many have already started to introduce legislation to address these - the UK's Diverted Profits Tax being a case in point.
Specifically, to the extent that the changes relate to the OECD's Model Tax Convention and Transfer Pricing Guidelines, their implementation is assured and should follow swiftly. The speed with which they are then implemented into existing bilateral tax treaties will be linked with the success of the OECD's proposed 'multilateral instrument', which the OECD has reported can be applied without any obvious technical barriers (though practical issues may be of more concern).
The proposed OECD rule changes that involve amendments being made by individual territories to domestic tax rules are likely to be widely but not universally adopted, though consistency and timing is uncertain.
So, what does BEPS mean in practice, who is it likely to affect, and what should your business be doing now?
Country-by-country reporting - what it means, and why it matters for local entities as much as their parents
Most attention on the BEPS reforms has focussed on transfer pricing, specifically new disclosure requirements announced under the OECD's Country-by-Country Reporting Implementation Package in June 2015. The OECD's intention is that tax authorities will now be able to integrate country-by-country (CbC) reporting into their regulatory frameworks, ensuring the swift introduction of new transfer pricing reporting standards to ensure greater transparency on multinational enterprises' (MNEs) structuring of their operations. This will involve a three-tier global standard for reporting of transfer pricing information:
- a CbC reporting template, giving a financial snap-shot of a company's global operations;
- a 'master file', giving an overview of a company's global transfer pricing policies, global business operations including intangibles; and
- a 'local' file, providing detailed information on any inter-company transactions entered into.
Now it is certainly the case that CbC reporting is only going to impact MNEs with annual consolidated group revenue equal to or exceeding EUR 750 million per year. For these companies it will introduce a new and onerous compliance burden, with the 'reporting entity' (the parent company) now required to disclose key information for each country in which it operates - including revenues, profit before tax, current-year tax accruals, stated capital, accumulated earnings, the number of full-time employees and net book value tangible assets.
But disclosure requirements under the 'local file' are going to have a very direct impact on subsidiaries and local entities - in many jurisdictions going much further than is currently the case. Local companies will now be required to provide information on local entity management and organisational structure, intra-group payments and receipts (in respect of products, services, royalties, interest, etc.), information on financial data used to calculate 'arm's length' amounts, and details of any advance pricing agreements (APAs) or other tax rulings pertaining to local entities.
Managing a group subsidiary or local (constituent) entity? Here's what you need to know
OECD recommendations indicate that first filings under the new country-by-country reporting requirements are likely to be required for financial years starting on or after 1 January 2016, meaning that a company with a year-end of 31 December 2016 will need to file a CbC report by no later than 31 December 2017. While this impacts, predominantly, the head offices of MNEs with annual consolidated group revenue in excess of EUR 750 million, constituent entities, too, are likely to face additional concerns. Information submitted by multinational head offices will now be available for sharing across all jurisdictions cited in the master file. In other words, information submitted by a head office in London will be accessible to tax authorities in Paris and Frankfurt. What happens if the UK tax authorities have access to information supplied by a head office in London that has not been seen by its local entity in Paris? As global tax managers come under ever greater pressure, there will inevitably be a trickle-down effect in ensuring all constituent entities are fully aware of (and in line with) information submitted by their head offices.
Data collection - are you ready?
A report mid-2015 suggested only 54% of MNEs were taking steps to prepare for CbC reporting. What actions should you be taking to ensure you are ready for CbC compliance requirements?
Parent companies should undertake a 'CbC Audit'. Local entities need to know what information their parents are likely to require, how it will be submitted, and what they need to do to be fully consistent with this. How far do local entities' reporting strategies meet the requirements of the 'local file'? How far are these consistent, group-wide? Have you considered a 'dummy-run' exercise to flag any inconsistencies in local reporting systems? Start thinking about your group's transfer pricing policies, particularly regarding the treatment (and allocation) of intangible assets. What restructuring might you need to undertake?
BEPS certainly isn't going to go away. The compliance burden on local entities is going to get more demanding, not less. The next 12 months could prove invaluable in ironing out potential inconsistencies before the first submissions are due next year.